• As equity markets reached another all-time high this week, investor sentiment shows signs of continued momentum.22 Domestic stock prices have been supported recently by expectations for continued slow, but steady, economic growth in the U.S., an improving macro outlook within the energy markets, and optimism surrounding the prospects for tax reform late this year or early next.23
  • According to an October 2017 University of Michigan survey, investors expect the good times to continue into next year.24
  • Approximately 65% of investors surveyed in the University of Michigan’s latest poll, which measures the percentage of investors that expect stock market prices to increase in the next year, expect stocks to generate another year of positive returns in 2018.24 October’s figure brings investor expectations for positive next-year returns to a nearly two-decade high.24
  • Indeed, recent momentum could be a tailwind for continued market appreciation in 2018. But while sentiment remains supportive, equities could also face potential headwinds next year. The S&P 500 Index has climbed more than 16% year to date, and equity valuations currently appear to be stretched based on a variety of measures.25
  • To this end, it may also be a reasonable interpretation for investors to read October’s nearly two-decade high sentiment figure as a potential warning sign that more volatile conditions could lie ahead, as was the case in mid-2007.

1 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
2 Bank of America Merrill Lynch U.S. High Yield Master II Index.
3 Bank of America Merrill Lynch U.S. High Yield Energy Index.
4 S&P Leveraged Commentary and Data Weekly Wrap, October 19, 2017.
5 Thomson Reuters Lipper.
6 Bank of America Merrill Lynch U.S. High Yield Metals and Mining Index.
7 Credit Suisse Leveraged Loan Index.
8 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
9 Bank of America Merrill Lynch U.S. 10-year Treasury Index.
10 Bank of America Merrill Lynch U.S. Corporate Master Index.
11 CNBC, http://cnb.cx/2yzg3gN.
12 Platts, http://bit.ly/2hTvyGC.
13 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
14 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
15 Credit Suisse Leveraged Loan Index (energy component).
16 Alerian, http://bit.ly/2yKWiRz.
17 Standard & Poor’s, http://bit.ly/2ydsLD0.
18 Bloomberg, https://bloom.bg/2yBEZ5K.
19 Bloomberg, based on consensus analyst earnings expectations over the next 12 months.
20 Bloomberg, https://bloom.bg/2xSxVEO.
21 Federal Reserve Bank of St. Louis, http://bit.ly/2oMWaP2.
22 Federal Reserve Bank of St. Louis, http://bit.ly/2jZjDYt.
23 Federal Reserve Bank of Atlanta, http://bit.ly/1IYTEct.
24 Bloomberg as of October 19, 2017. Based on data from the University of Michigan Mean Probability of an Increase in Stock Market Prices in the Next Year.
25 Yale University, U.S. Stock Markets 1871–Present and CAPE Ratio is one measure among many by which stock market valuations appear to be above their long-term average, http://bit.ly/1qlZ47U.

The Alternative Thinking Week in Review market commentary and any accompanying data (“Market Commentary”) is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The Market Commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such Market Commentary. The Market Commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the Market Commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.